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Finding Donors Expensive But Defensible

February 12, 2014 Michael Vcelik

Budgets are under constant pressure everywhere. This is especially true in the nonprofit sector where revenue sources from grants, donors, investment income, and federal, state and local agencies can vary greatly from year-to-year. This challenges senior management, and chief financial officers in particular, to allocate limited budget dollars to the competing demands and needs within an organization so they match their preliminary revenue projections.

All too often, decisions to reduce or reallocate funds to balance the budget that appear obvious and beneficial in the short term have very negative long-term consequences. One area in recent years that has come under increasing pressure during the budget process is the direct mail program. Budget reductions in this area normally come in one of two forms — reduction in acquisition efforts and/or reduction in the cost of packages.

These decisions seem perfectly logical and are reinforced in the short term as net income increases due to reductions in expenses. Initially, gross revenue declines as well, but net profit improves as expenses are decreased at a greater rate. This gives the impression that the direct mail program is being run more efficiently.

That observation couldn’t be further from the truth. By year three of such an approach, net income reverses course and declines dramatically due to the shrinking universe of donors on the file, a decrease caused by the reduction in acquisition efforts to replace donors who were lost through attrition.

In reality, acquisition is the process of purchasing or acquiring an income-producing asset much like a bond purchase. Organizational funds are used to purchase a bond (donor) at a premium (loss) that produces a steady stream of interest income (donations) for years to come. Unlike a bond, where at maturity you receive your principal back, a donor file returns far more value at maturity in the form of a planned gift. If viewed in this way, the perception of acquisition begins to change dramatically.

A donor file, on average, will lose close to 30 percent of its active donors each year. Failure to replace these donors through acquisition results in a smaller pool of active donors and reduces the income stream. That’s a reduction in not only donations but also planned gifts.

As a general rule, for every 100,000 donors who made a donation in the previous 12 months, annual acquisition efforts must receive enough funding to replace 30,000 donors to at least maintain an equivalent revenue stream.

Perception is everything and all too often acquisition is viewed negatively because it is a function that not only costs a lot of money but one that initially loses money. It is understandable why the acquisition budget finds itself first in line for budget cuts in organizations that by their very nature traditionally focus on cost containment and lack the experience and understanding of revenue generation.

Another way to view acquisition from a cost standpoint is to apply the same logic that is used when purchasing a piece of equipment. The standard analysis for making a capital investment in equipment is a five-year payback. Organizations use this benchmark all the time when making capital investments. Likewise, acquisition efforts should at least be breaking even by year five, and preferably by year three. If they’re not, you have a different problem. When applied to acquisition, the five-year payback analysis makes perfect sense and should be used as a benchmark.

By the way, direct mail is not dead. It is generally mismanaged, micro-managed and/or unfunded. Here’s a positive example from Boys Town. In comparing data from the end of 2005 through the end of 2012, the organization increased its annual budget in direct mail by 70 percent. That increased the number of active donors who have given a gift in the past 12-month period by 56 percent and increased net profit for operations by 99.5 percent.

Acquisition is a critical and essential part of maintaining a healthy and sustainable income stream from a direct mail program. Its value should not be underestimated. Rather than being the first in line when budget cuts are being discussed, it should be one of the last areas considered for funding reductions.

All too often, short-term time horizons that focus on cost instead of long-term results dominate the analysis and thought process. The keys to having a successful program start at the top of an organization, where finance and senior management must take a long term, results oriented approach to their direct mail program.

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Michael T. Vcelik is senior director, annual giving, marketing and communications at Boys Town in Boys Town, Neb. His email is Mike.Vcelik@boystown.org